Kaye v. (us)
| Decision Date | 26 April 2011 |
| Docket Number | No. 3:09–cv–2263–M.,3:09–cv–2263–M. |
| Citation | 453 B.R. 645 |
| Parties | William S. KAYE, Liquidating Trustee of BFW Liquidation, LLC f/k/a Bruno's Supermarkets, LLC, Plaintiff,v.LONE STAR FUND V (U.S.), L.P., Lone Star Partners V, L.P., Lone Star Management Co. V, LTD., LSF V International Finance, L.P., LSF5 Affiliate Finance Co. LTD., LSF5 Bruno's Holdings, LLC, LSF5 Bruno's Investments, LLC, Hudson Advisors, LLC, In Line Investments, LLC, Brian P. Carney, Keith D. Mills, Kyle David Gayler, Marc Lewis Lipshy, Layne B. LeBaron, David M. West, Len William Allen, Jr., Scott Michael North, Robert M. Zielinski, Kent Moore, Michael A. Prushan, Brian Hotarek, and Kenneth Jones, Defendants. |
| Court | U.S. District Court — Northern District of Texas |
OPINION TEXT STARTS HERE
Ross D. Kennedy, Bradley J. Benoit, Bracewell & Giuliani LLP, Houston, TX, for Plaintiff.
Jean C. Frizzell, Jeremy Doyle, Nathan M. Smith, Reynolds Frizzell Black Doyle Allen & Oldham LLP, Paul J. Dobrowski, Lee Marshall Larkin, Dobrowski LLP, Houston, TX, for Defendants.
Before the Court are motions to dismiss filed by Kent Moore, Scott Michael North, David F. Mills, Robert Zielinski, and Kyle David Gayler (collectively, the “Bruno's Officer Defendants”) [Docket Entry # 46]; Brian Hotarek, Brian P. Carney, and Kenneth Jones (collectively, the “BI–LO—Bruno's Defendants”) [Docket Entry # 47]; and Lone Star Fund V (U.S.), L.P., Lone Star Partners V, L.P., Lone Star Management Co. V, Ltd., LSF V International Finance, L.P., LSF5 Affiliate Finance Co. Ltd., LSF5 Bruno's Holdings, LLC, LSF5 Bruno's Investments, LLC, Hudson Advisors, LLC, In Line Investments, LLC, Marc Lewis Lipshy, Layne B. LeBaron, David M. West, Len William Allen, Jr, and Michael A. Prushan (collectively, the “Lone Star Defendants”) [Docket Entry # 48]. Also before the Court is Plaintiff's Objections to and Motion to Strike Exhibits [Docket Entry # 56].
For the reasons stated below, Plaintiff's Objections to and Motion to Strike Exhibits is GRANTED in part and DENIED in part; the Lone Star Defendants' Partial Motion to Dismiss, and the BI–LO—Bruno's Defendants' Motion to Dismiss are DENIED; and the Bruno's Officer Defendants' Motion to Dismiss or, in the Alternative, Motion for More Definite Statement is GRANTED in part and DENIED in part. The Court grants Plaintiff leave to amend his claims against the Bruno's Officer Defendants.
Bruno's was founded in 1932 as a local market. By 2005 it had grown into a regional food retailer, operating 192 stores in the southeastern United States. On February 5, 2009, Bruno's filed a Chapter 11 bankruptcy reorganization proceeding. A plan of reorganization was confirmed on September 25, 2009, with an effective date of October 6, 2009. Bruno's has insufficient assets to satisfy the claims of its creditors. The plan of reorganization anticipates that Bruno's unsecured creditors will recover only through successful claims brought by the Trustee.
The Trustee filed this suit against Bruno's corporate parents, their affiliates, other related companies, and several of Bruno's former directors and officers, seeking to recover alleged fraudulent transfers and preferences under the Bankruptcy Code and Alabama state law, and alleging breaches of fiduciary duties under Delaware law. Due to the presence in this case of numerous defendants who are represented by different counsel, the Court employs various labels to identify particular groups of defendants. In addition to the labels defined above, the Court uses the term “Individual Defendants” to refer collectively to all the individual, non-entity defendants. Further, the Court uses the term “Moving Defendants” when referring collectively to the Bruno's Officer Defendants and the BI–LO—Bruno's Defendants.
The following is a summary of the allegations in the Amended Complaint that are relevant to the Motions currently before the Court.1
After emerging from a prior bankruptcy in 2000, Bruno's 2 was purchased by Ahold U.S.A. Holdings, Inc. Ahold combined Bruno's with BI–LO Holdings, LLC and its wholly-owned subsidiary, BI–LO, LLC (“BI–LO”), and as a result, BI–LO, which also was a regional grocery store chain, owned all of the equity in Bruno's. In January 2005, Lone Star U.S. Acquisitions, LLC acquired BI–LO Holdings for a purchase price of $669,581,000 (the “Lone Star Acquisition”). BI–LO and Bruno's, as consolidated entities, were operating at a loss before the sale to Lone Star Acquisitions,3 and Ahold had to provide financial support so that the consolidated entities could continue operations through the closing date of their sale to Lone Star.
After the Lone Star Acquisition, BI–LO Holdings was immediately assigned to a newly formed entity, LSF5 BI–LO Investments, LLC, which is the wholly owned subsidiary of LSF5 BI–LO Holdings, LLC. LSF5 BI–LO Holdings is wholly-owned by Lone Star Fund V (U.S.), L.P. (“Lone Star”) and its affiliates.4
Prior to 2007, BI–LO and Bruno's financials were prepared on a consolidated basis. The Trustee claims that Bruno's as a stand-alone entity was insolvent, severely undercapitalized, and operating at a loss in 2005. In support of these assertions, the Trustee cites a report prepared in March 2006 by William Blair & Company, LLC for Lone Star (the “William Blair Report” or the “Report”), which was based on Bruno's 2005 financial data. The William Blair Report states that BI–LO would sell for $102,791,000 to $500,527,000 more as a stand-alone entity than if sold as a combined entity with Bruno's. According to the Report, “ ‘the dilutive effects of [Bruno's] [we]re clear,’ ” and the chances of selling BI–LO with Bruno's attached were “ ‘extremely limited and probably non-existent if [Bruno's] performance [was] not significantly improved.’ ” (Am. Compl. ¶ 30 ().) Based on these allegations, the Trustee asserts that Bruno's had a negative equity value and was balance sheet insolvent in 2005.
The Amended Complaint also alleges facts concerning Bruno's operating performance. The William Blair Report states that Bruno's had a history of “ ‘negative operating performance ... [that could] only be reversed with significant investments of time, capital and management attention.’ ” ( Id. ¶ 31 (alteration in original).) Further, Bruno's had substantial federal and state net operating loss (“NOL”) carryforwards in 2005. In particular, Bruno's had NOL carryforwards of approximately $150,000,000 in Alabama in January 2005, which rose to $210,000,000 by December 30, 2006. The Trustee alleges this increase reflects that Bruno's continued to incur significant operating losses over that time period. Furthermore, “the William Blair Report states that there was ‘limited availability of all of the necessary elements required for reversal’ of Bruno's history of operating losses.” ( Id.) This “pattern of significant operating losses in 2005 and 2006,” the Trustee alleges, contributed to Bruno's insolvency, including “cash flow insolvency.” ( Id.)
The Amended Complaint further alleges that Bruno's was “severely undercapitalized.” The William Blair Report states that Bruno's was “in need of significant capital investment, and the return on this investment [wa]s unclear.” ( Id. ¶ 31 (internal quotation marks omitted).) Specifically, the Report called for $67 million of capital improvement. According to the Amended Complaint, Bruno's management also believed that a lack of capital investment was an issue that eventually contributed to Bruno's demise. In support of this allegation, the Amended Complaint cites an affidavit by Scott North, executed in March 2009 and submitted in Bruno's bankruptcy, that states, “ ” ( Id. ¶ 32; (quoting North Aff. 2, Mar. 7, 2009, ECF No. 49–4).) The Amended Complaint claims that this lack of adequate capital dates back to 2005.
The William Blair Report also states that Bruno's union relationships further reduced the value of Bruno's. Bruno's entered into collective bargaining agreements (“CBAs”) beginning in 2005, while Bruno's competitors in the region were non-union operators. The CBAs contained successorship clauses that required any prospective purchaser of Bruno's to assume the CBAs, allegedly limiting Bruno's attractiveness to potential buyers. According to the Amended Complaint, Timothy Carroll, a principal of William Blair & Company, LLC, presented an affidavit to this effect in March 2009, in Bruno's bankruptcy, stating, “ ‘It is my professional opinion that the existence of a requirement to sell the Bruno's stores inclusive of the collective bargaining agreement materially reduces the attractiveness and value of the assets....' ” ( Id. ¶ 33 (omission in original) (quoting Carroll Aff. 2, Mar. 6, 2009, ECF No. 49–2).) In fact, Bruno's management described the successorship clauses in the CBAs as “ ‘an impenetrable barrier to selling [Bruno's] stores.’ ” ( Id. (alteration in original) (citing Wade Aff. 7–8, Mar. 7, 2009, ECF No. 49–3).)
Lone Star significantly restructured BI–LO and Bruno's immediately following the Lone Star Acquisition (the “2005 Restructure”). As part of this restructuring plan, Lone Star outsourced distribution by selling BI–LO's warehouse and transportation assets to C & S Wholesale Grocers, Inc. On December 22, 2004, BI–LO entered into a ten-year supply agreement with C & S, under which BI–LO would purchase most grocery products for BI–LO and Bruno's exclusively from C & S.
Additionally, in June 2005, Lone Star raised money through property sale-leasebacks...
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